Author: cwatters@primeres.com

Prior to 2008 there was a mortgage lender on almost every corner. The barrier to entry for loan officers was very low and the income potential was very high. That in itself was a recipe for disaster.  There were literally individuals getting into the mortgage industry with minimal experience in any type of work much less lending and making well over 6 figures in their first year. There was just as many lending products as there was lenders. Fast forward 10 years and the lending landscape has done a 180.

In today’s lending world compliance takes center stage and getting into the lending business as a loan officer takes a lot of work. As far as loan products go there is essentially four: Conventional, USDA, VA, and FHA.  The government backed loans are extremely popular due to the flexible in the underwriting guidelines and low down payment features. These programs are self-funded by the collection of upfront and monthly fees.

FHA has a monthly premium that borrower’s pay each month as well as an up-front funding fee. The monthly fee is actually called MIP (Mortgage Insurance Premium). USDA also has a monthly fee paid by the borrower as well as an upfront fee. USDA however calls their upfront fee a Guarantee Fee and their monthly fee an Annual Premium. The idea for both loan types is the same in that these fees are collected so the programs can sustain themselves. The agencies at times will raise or lower the fees based on the amount of money that is each fund.  The USDA fee that is paid monthly can be a little confusing for some because it is called an annual fee but it is collected monthly. Both FHA and USDA use a factor for their fees. The FHA factor for their monthly MIP is currently .85%. In theory a customer who borrows $100,000 by using a FHA loan will pay roughly $85 per month for their MIP. USDA currently uses .35% for their annual premium. The math is as straight forward as the FHA loan. The same $100,000 loan using a USDA Loan would be around d $29 per month. The math works out as follows: $100,000 x .35% divided by 12 months.

While the fees are calculated differently and called something different they both serve the same purpose which is to fund their programs. Without these fees these two widely popular programs may not exist at all or at least be drastically different from what they are today. Today’s mortgage industry is very dependent on government backed lending and many home buyers benefit from these great programs.

The mortgage loan process is notorious for using words and acronyms that are somewhat foreign to someone who has never purchased a home or worked in the lending business. It’s not uncommon to hear someone rattle off things little LTV (loan to value) or DPA (down payment assistance) and maybe even CLTV (combined loan to value). The list goes on and on but the point here is that the lending process almost has its own language. Depending on the loan type you may hear different things or a combination of things that seem new to you. One term that comes up in most all loan scenarios is Seller Concession.

Seller Concessions can easily be explained as the amount of closing costs the seller will pay for the buyer. The loan product and sometimes loan to value will determine the amount the seller can pay. The programs will allow a total not to exceed a certain percentage of the sales price. The lender however will want to see that amount converted to a dollar amount. So for example the conventional loan allows 3% seller concessions when the LTV is above 90% and will go to 6% when its 90% LTV or below. In this scenario if the sales price was $100,000 and the LTV was 95% then the max the seller could pay for the borrower in closing costs is $3,000. The government insured loans such as FHA, VA and USDA are much more aggressive.  The USDA Loan for example allows 6% seller concessions. From the previous scenario the seller can pay up to $6,000 of the buyers closing costs on that same loan of $100,000. This is one of the many reason there has been a significant rise of government insured loans over the last 10 years. The government backed loans allow borrowers to get into homes with little to no money out of pocket.

The million dollar question is usually, “Why would a seller pay the closing costs in the first place?” The logic is pretty simple. Many borrowers today have minimal savings and if they are having to put money into the transaction for down payment it usually doesn’t leave much for the closing costs so without this feature there would be a lot less buyers for the sellers to sell their homes to. The theory is that the sellers price this into their negotiations so they are not really taking much if any a hit on the transaction.  Seller concessions are a very important part of today’s home loan process.

Home values are on the rise and it’s an excellent time to be a buyer. If you think you’re ready to buy a home, but the idea of putting 20% down intimidates you, the USDA zero down mortgage might be something to consider. Mortgage rates across the board are currently inexpensive. This is great for potential homebuyers who want to keep their monthly mortgage payments low. Buying now instead of waiting until next year may save hundreds in monthly house payments. Although the necessity of putting 20% down was a reality in the past, today’s market doesn’t require it. This is due largely to more secure investments and mortgage insurance. The standards for homeownership have put more focus on the buyers’ ability to repay a loan as opposed to just credit worthiness. This ensures homes are being sold to buyers who plan on paying out their mortgages.

There are advantages to making larger down payments: there is often no need for mortgage insurance which saves some on monthly payments and you may get a slightly lower rate, however, most rates are based on the going price of bonds, so there isn’t much variance among loan programs. Saving up for the down payment may be difficult, especially when faced with unexpected expenses like medical treatments and automobile repairs. The option to pay nothing down is perfect for buyers who want to save their reserves for such situations and make sure they are able to budget their monthly mortgage payments in the case of a future financial emergency.

Mortgage insurance is what allows for loan programs to require no down payments. Mortgage insurance is a small fee wrapped into your monthly payment that serves as insurance if you default on your mortgage. This protects the investor and permits them to securely invest in your loan. All loans with less than 20% paid down are required to have mortgage insurance. The USDA zero down mortgage has what they call a “guarantee fee” which serves as a sort of mortgage insurance. Where mortgage insurance is already affordable, the guarantee fee is the lowest available. In fact, the USDA just reviewed its rates in October 2016, and guarantee fees went down. They are now 1.00% up front and .35% annually. The upfront fee is actually financed into the loan so nothing is due from the buyer. The annual fee is also broken down and paid monthly. This saves buyers up to hundreds of dollars a month in insurance versus other low-cost mortgages of the same purchase price.

You should consider making a down payment when evaluating your options, but down payments aren’t necessary in today’s market. Many financially-savvy buyers find that bypassing the upfront down payment gives them the freedom to use their savings for other important expenses, including home renovations and moving costs. The USDA zero down mortgage is great if you either don’t have a substantial savings or don’t want to use it all at once, or if you want a low-cost program with affordable insurance.

Getting approved for a mortgage is becoming simpler every year. Many lenders today will be able to preapprove you in just a few minutes over the phone. The entire loan process, from beginning to end, usually takes less than 30 days. The most difficult part is often finding the right house.

The popular zero-down USDA mortgage doesn’t take any longer to complete than other loan programs despite being the lowest costing option on the market. Like competitors, USDA evaluates potential buyers based on specific criteria, although the USDA has significantly more forgiving standards.

What to expect during the USDA loan process:

After you’ve done your research and have decided the zero-down USDA loan is the best option, you must find a USDA-approved lender. The USDA loan is only offered through certain lenders that are backed by the USDA.

When you choose a lender, they will ask you a few preliminary questions about your finances and credit history.

Unlike other loan programs, USDA has income restrictions that are favorable to middle-class or lower-income individuals and families. This is because the USDA wants to provide zero-down housing assistance to people who need it in order to stimulate the economy. The income guidelines are determined by the region, average income, and number of people in your household.

If your income qualifies you for the USDA loan, the lender will then look at your credit history. USDA’s credit standards are more accepting than competing loan programs. Your FICO score must be at least a 620. The lender will look at your payment history to determine your credit worthiness. You will be required to have at least two current lines of credit with positive balances and no late payments within 30 days. You also can’t have any new collections added over the previous 12 months and there can be no outstanding federal debt or open judgements against you. If you have no credit, you can add a co-borrower whose credit meets the requirements.

After your initial review, you will need to find a house in the price range approved by your lender. For the USDA loan, your house will have to be in a USDA rural area. These areas aren’t always in the open country; there are often suburbs and small communities that fall within the rural boundaries. There is no limit on the purchase price, as long as you can budget it, and the home can be existing, newly constructed, or foreclosed as long as it passes a home inspection.

After finding the perfect house and submitting an offer, you will then wait while the lender and Title Company go through the process of preparing the funds and paperwork for the purchase. There will be no money paid out of your pocket since USDA requires no downpayment, and closing costs and fees can be financed into your loan.

Once everything has been put into place, you will meet at the Title Company to finalize paperwork. The process for obtaining a USDA loan is quick and simple.

Single-family home loans are on the rise due to low mortgage rates, rising rental costs, and a recent building boom. Affordable mortgages are more obtainable today than they’ve been in years. Buyers are able to purchase their dream homes, even brand new constructions, for $0 down. Many low-cost mortgages are on the market, but the lowest of all is the USDA RD loan. This loan is the only loan requiring no downpayment, other than the veterans-exclusive VA loan. The USDA RD program is available through approved lenders for buyers meeting lenient standards.

In September 2016, home sales were up 8% from August. More housing permits, which precede construction by 60 days, are being issued and builders are optimistically predicting a prosperous 2017. This year, new construction has already increased by 5%. This influx of new homes on the market necessitates buyers, many being first-time buyers who want the opportunity to make their own design decisions at low cost.

USDA loans have no loan limit and new constructions are eligible, so a buyer can purchase a new home with no money down, excluding any arrangements they may have directly with the builder. The home must be in an approved rural development area, which many new homes are as neighborhoods are being developed on the outskirts of major cities and on rural land.

Existing homes and foreclosures are also eligible for the USDA loan. These must pass home inspections and meet USDA’s standards, including residing in an approved area. Buyers must plan to use the home as their primary residence and not as an investment property. There are many existing RD-eligible homes as the majority of U.S. land is considered rural.

Downpayments are just one of the costs of buying a home. Every loan, regardless of loan program, has seller and buyer closing costs that are due at the closing table. Typically closing costs add up to around 3% of the purchase price of the home, but they can vary depending on the loan particulars. Often the purchase price of a home is increased to allow the seller to cover the closing costs, but many programs have limits on how much can be covered. The USDA program allows up to 6% of the purchase price to be financed into the loan balance, which is much more than average closing costs. This means the buyer is not expected to come up with any cash out-of-pocket.

All mortgages with less than a 20% downpayment are also subject to mandatory mortgage insurance. This is insurance for the lender in case the buyer stops making mortgage payments. RD has a guarantee fee instead of mortgage insurance, and it is much lower than competitors: 1% upfront and .35% annually. Like closing costs, the upfront guarantee fee may be financed into the loan as well, along with the .35% annual fee. This makes for lower monthly payments than competing loan programs, despite no downpayments.

It’s an exciting time to be a homebuyer in America. Rising rental costs and low mortgage rates have generated interest in permanent housing. Mortgages have never been more affordable and with countless resources available, homebuyers are now able to educate themselves on their options like never before.

Low-downpayment mortgages are currently the most sought after on the market. Low downpayments give buyers more financial freedom without the obligation to put thousands down for the purchase of a new home. FHA requires 3.5% down, and there are even 97% conventional programs emerging that require just 3% down which is a big break from the formerly required 5%-20%. But it’s surprisingly little-known that there is a zero-downpayment mortgage option available to qualified applicants: the USDA Rural Development loan.

The Rural Development loan may not get as much exposure because it has only been active for around 20 years and it is only offered through USDA-approved lenders. But lenders who do offer the Rural Development loan can confidently loan to qualified borrowers with the promise that the mortgages are guaranteed by the USDA.

Qualified buyers will earn incomes that fall in a USDA-approved range—typically low- to modest-incomes. The Rural Development loan is perfect for first-time buyers who haven’t saved up for a large downpayment or who haven’t owned and sold a home to have equity for a downpayment. Income restrictions keep the loan accessible for middle-class workers who really need help purchasing a new home. The Rural Development loan came to be as a result of the USDA promoting the movement to strengthen rural economies.

Rural Development loans are only valid for homes in rural-approved areas. The USDA recognizes the economic potential of dwindling rural communities and undeveloped terrain in the U.S. This is why they are committed to assisting people who want to reside in and help grow these potentially prosperous areas. Building up neighborhoods will generate more revenue and the need for more resources, consequently boosting the overall market. The homes eligible for purchase with the Rural Development loan can be new constructions in up-and-coming neighborhoods, existing homes, or even foreclosures. There is no purchase price limit. The term “rural” shouldn’t be discouraging; almost 97% of the U.S. falls in a rural-approved region. Homes in suburbs or exurbs are often eligible for the Rural Development loan.

The Rural Development loan has a leg-up on the competition with zero required downpayments, but it is overall more affordable than most other mortgage programs. Closing costs than are mandatory for loans in every program, but they can be financed into a Rural Development loan. So, instead of paying up to 3% of the purchase price out of pocket at closing, buyers can bundle those costs in with their mortgage payment. This is the same for the mortgage guarantee fee which is a small fee paid by the borrower to protect the lender against mortgage defaults. Instead of paying 1% up front, buyers’ fees are rolled into the loan price. With low rates and even lower guarantee fees, Rural Development mortgage payments are usually hundreds of dollars less than other loans with the same purchase prices.

The USDA Loan, also referred to as the RD or Rural Development loan, is a mortgage assistance program insured by the USDA that provides 100% financing and no money down loans. Previously known as the Section 502 loan, the USDA program requires no down payment for qualified buyers on homes in rural areas. It is quickly becoming one of the most popular mortgage loan programs due to its low cost and widespread availability through USDA-approved lenders.

Who is eligible for the USDA Loan?

The USDA loan is available for buyers who earn low- to- modest wages and who have FICO scores of at least 620. The USDA developed the RD loan to give middle-class Americans the option to purchase a home without the burden of a large down payment. The income restrictions are based on the median income in a given region and can vary with household size. USDA is more relaxed on credit standards than most other loan programs. Buyers with a 620 or above may be approved. Some disqualifying factors are inadequate number of active trade lines (there must be at least two), collection accounts being added within the previous 12 months, late federal debt obligations, and outstanding judgements. Approved lenders may consider other trade lines if necessary. A buyer must be able to budget their proposed house payment with their current obligations. The debt-to-income ratio must not exceed 41%.

Which properties are authorized for the USDA Loan?

The USDA loan is eligible only on single family residences in approved rural areas. The buyer has to live in the house as their primary residence. Rural areas are defined by the USDA and include open land, small suburbs, and exurban communities. The vast majority of U.S. land is USDA-eligible, so finding a qualifying home isn’t difficult. The home must pass all home inspections and meet USDA’s safety standards.

Is the USDA Loan more affordable than FHA?

The USDA Loan requires zero money down, whereas the FHA loan requires at least 3.5% of the purchase price as a down payment. USDA mortgages have lower mortgage rates and mortgage insurance than FHA. USDA has what they call a guarantee fee that is broken into an upfront and an annual, or monthly, fee. These fees just decreased in October 2016, so USDA mortgages are even more affordable than before. The upfront fee is 1.00% and can be financed into the loan and paid throughout the term of the mortgage. The monthly fee is only .35% and is also rolled into the loan. These fees are almost a point lower than FHA’s and they can be bundled into the payments instead of being paid upfront. With the lower guarantee fees and mortgage rates, a USDA loan with a $250,000 purchase price costs $100 less than an FHA mortgage of the same price.

The already low-cost RD loan just got more affordable in October of 2016 when the USDA lowered upfront and monthly fees. This loan was previously popular because of its 100% financing, meaning there is no required down payment. The next cheapest loan, other than the VA which is veterans-exclusive, is the FHA with 3.5% down.

Prior to October, RD’s upfront fee was 2.75%; now it is 1.00%. The former monthly fee was .50%; now it is .35%. This makes for a significant difference in monthly mortgage payments, especially in comparison to FHA’s fees which are almost a point higher and which can’t be financed into the loan. The USDA typically reviews financials each year, so the fee may drop again in 2017. As for now, the recent changes will be in effect until September 2017.

The upfront guarantee fee greatly impacts the loan amount. At 2.75%, a loan with a $100,000 purchase price would increase by $2,750. Now, at 1%, the loan will only increase by $1,000. Since this fee is rolled into the mortgage and paid out through the loan term, the monthly payments are lower.

The former .50% annual guarantee fee has been reduced to .35% which affects the monthly mortgage payment as well. When before, it would cost approximately $40 per month on a $100,000 mortgage, it now costs around $30. These reductions save buyers an estimated $20 a month per $100,000 financed.

It may not seem like a generous decrease at first sight, but when a borrower is on the brink of exceeding their debt-to-income limit, the additional monthly savings in fees alone can save the loan.

Because there are no purchase price limits with the 100% RD loan, buyers can essentially borrow more money than with conventional, FHA, or even VA programs. The buyer just has to prove that they can budget the monthly house payments with their current debt obligations. There are income restrictions with the 100% RD loan, however, and they are based on the number of people in a household and the region in which they live. If a borrower’s income exceeds the maximum limit, they will not be eligible for an RD loan.

RD loans have income restrictions because USDA wants families who need the most help to have access to the program first. By providing a 100% loan and other housing assistance, they aim to build up rural communities and give hard-working families a leg-up. More affordable housing generates more revenue for surrounding areas and promotes prosperity in our communities. The recent pricing changes for the RD loan will have an impact on the entire economy.

The RD (Rural Development) mortgage loan is available to buyers purchasing homes in rural or suburban areas of the country. It requires no down payment, has low interest rates, and inexpensive mortgage insurance in comparison to FHA loans. It is the least recognized loan on today’s market, but it is growing in popularity, especially among first-time homebuyers.

While making a large down payment has benefits, average Americans don’t have 3% to 20% saved for a down payment on a new home. The RD mortgage is great for those borrowers who can afford a mortgage payment but who don’t have a lot of cash reserves at their disposal. These borrowers are possibly recent college graduates who have just begun their careers but who need their savings for other expenses. They might be a growing family who’s just had their first child. Or maybe an individual who had unexpected medical expenses. Borrowers from every scenario can take advantage of the RD loan’s benefits. Even people who have substantial savings choose this loan because they have the freedom to use their savings for home improvements or other moving costs.

While the RD loan is down payment free, there are closing costs due for each loan, regardless of program, before the transaction is complete. Typically these costs are around 3% of the purchase price. RD permits the seller to cover up to 6% of the purchase price in closing costs. The seller doesn’t pay them out of their own pocket, but instead the purchase price is raised to accommodate the closing costs so they are paid out through the life of the loan instead of at the closing table. Other loan programs cap the amount allowed to be covered by the sellers, so it is a relief for buyers to walk away from the closing table with absolutely no money paid up front.

RD loans must be for RD-approved rural homes. “Rural” doesn’t just indicate country landscapes, though; RD mortgage boundaries also often include suburban areas outside metropolitan centers. It is estimated that over 95% of the U.S. terrain falls within rural guidelines. Depending on the state, the majority of land may be RD-eligible. Another added benefit is that the RD loan is allowed on new constructions and foreclosed properties as well as existing homes. There is also no maximum purchase price as long as the buyer can budget the mortgage payment.

The RD loan is only offered by lenders approved by USDA. The RD loan is government-backed which allows for the lower interest and mortgage insurance rates. It is a less risky loan for investors which is why they can loan a mortgage with no money down from the buyer.